Biden’s Spending Policies Result From ‘Lack of Understanding,’ Maybe Beginning of ‘Inflationary Regime’: Portfolio Manager

Tavi Costa, portfolio manager at Crescat Capital, in an interview with NTD's Steve Lance on "Capitol Report", on Sept. 14, 2022. Screenshot via NTD video

Tavi Costa, portfolio manager at Crescat Capital, has criticized the Biden administration’s spending measures, warning that Americans’ inflation woes might have only just begun.

During the recent White House celebration of the passage of the “Inflation Reduction Act,” the president defended his government’s massive spending by saying that “we spend, but we pay.” Biden said that the Inflation Reduction Act will lower the country’s deficit by $300 billion over the next decade. The deficit declined by $350 billion in his first year in office and will fall by $500 billion this year, the president claimed.

As such, “I don’t want to hear it anymore about ‘big spendin’ Democrats,’” he stated. When asked about the president’s comments in an interview with NTD’s “Capitol Report,” Costa said that there is a “lack of understanding” about what fiscal spending does to inflation.

Back in the 1960s and 1970s, there was a “general sense” from most policymakers that a reckless amount of fiscal spending would end up generating inflation. Today, “we don’t have that,” he said.

The United States is seeing “really high” deficits. The push to cut reliance on China and other places, rebuild America’s infrastructure, and forgive student debt tend to be “very inflationary,” he said, adding that the “inflationary regime” might only be just starting.

Biden’s Sept. 13 Inflation Reduction Act celebration was held at the White House on the same day when the August inflation data was released. At 8.3 percent, it was the eighth straight month that inflation remained at or above 7.5 percent this year, according to data from the U.S. Bureau of Labor Statistics (BLS).

Stock markets reacted aggressively to the data, with the Dow Jones Industrial Average losing over 1,200 points and registering its worst day since June 2020. Costa pointed out that central banks across the world have shrunk their assets by around $3.5 trillion.

“You overlay that chart with NASDAQ, it’s the same chart. So it’s very clear to me that as we continue to see central bank balance sheets shrinking over time globally, that should also have a lot of impact on share prices of the overall equity markets here in the U.S.”

Fed Action, Unemployment

During the previous times when stock markets declined, the Federal Reserve would reverse its policy, either slashing rates to zero or doubling the size of its balance sheet. But now, “we’re seeing quite the opposite,” Costa said.

Today, as stock markets fall, the Fed is raising interest rates by 75 or 100 basis points. And, on top of that, the Fed is reducing its balance sheet by around $95 billion or more, he said. Such withdrawal of liquidity is going to be “a big deal.” The Dow Jones is down by around 15 percent year to date.

Costa is expecting the Fed to raise rates by 75 basis points during its upcoming meeting. He warns that the monetary and financial conditions of the global economy are tightening to a level that it won’t be able to handle.

Treasuries—which investors bet on as a way to protect their portfolio—are suffering along with equity markets. “This is a very, very tough environment,” he stated.

Citing past data, Costa said that when inflation accelerates above 2 percent for 2 years, unemployment rates begin to move.

“We’re at about two years now since the inflation began to move. I believe it was in April of 2020. And so I think we’re getting pretty close to a beginning of a move here on unemployment rates,” Costa said.